Kerala Public Finance and fiscal Policy | Kerala State PSC (KPSC) Preparation - Kerala PSC KAS PDF Download

Challenges Facing Kerala's Economy

Kerala's economy is facing three critical challenges:

• Decline in Agriculture and Allied Sectors: The contribution of agriculture and allied sectors to state income has significantly decreased. In 2004-05, these sectors contributed 17% and 23% respectively to state income. By 2013-14, their shares had fallen to 9% and 20%. Historically, agriculture was a major driver of economic growth, accounting for around 50% of state income in 1970-71. However, since the 1980s, its share has steadily declined due to rapid demographic and socio-economic changes, with a sharp drop to 18.25% by 2000-01.
• Sluggish Industrial Sector Performance: The industrial sector has shown poor performance, including negative growth in 2013-14, reflecting a decade of stagnation.
• Severe Resource Crunch: The state faces significant financial constraints, impacting its ability to fund development expenditure effectively.

Financial Overview of Kerala for FY 2015-16

• In the financial year 2015-16, Kerala experienced a 19.12% increase in revenue receipts, up from 17.84% in the previous year. This improvement was largely due to an increased share of central tax revenue following recommendations from the 14th Finance Commission. However, this gain was somewhat offset by reduced central assistance for state plans and additional obligations from restructured centrally sponsored schemes.
• According to the budget estimates for 2015-16, the state anticipated total receipts (excluding borrowings) of ₹77,625.52 crore, with borrowings projected at ₹15,605 crore. The total expenditure commitment was targeted at ₹95,324.77 crore. In reality, the state achieved only ₹69,213.37 crore in total receipts, falling short of the target. The decline in revenue receipts, coupled with reduced plan grants and increasing non-plan revenue expenditure, led to a greater reliance on debt. This resulted in higher borrowings and additional liabilities for the state.

Financial Performance of Kerala for FY 2016-17

• In the fiscal year 2016-17, Kerala estimated revenue receipts of ₹84,616.85 crore. However, by the end of December 2016, the state had collected only 59.57% of this amount, compared to 61.06% during the same period in 2015-16. This shortfall is primarily due to reduced collection of the state's own revenue, lower non-tax revenue, and decreased central grants resulting from changes in the funding patterns of centrally sponsored schemes.
• By December 2016, total expenditure had already surpassed 59.52% of the budget estimate, which mirrors the level from the previous year. The decline in revenue collection coupled with increasing expenditure commitments are significant concerns. The state also faced challenges with its deficit targets, with the revenue deficit, primary deficit, and fiscal deficit surpassing 68.12%, 59.38%, and 63.14% of the budget estimates, respectively.
• To address the declining trend in the state's own revenue, several revenue mobilization measures have been introduced. Analysis of monthly revenue collection from April to December shows a slight improvement in the state's own revenue. However, the impact of the government's November 2016 demonetization policy negatively affected the state's economy, causing collections from state revenue to decrease. Specifically, revenue growth fell to -16.33% in December compared to a 19.80% growth in October 2016. State own non-tax revenue dropped to 46.46% of the budget estimate for 2016-17 by December, down from 50.74% during the same period in the previous year. Despite a growth rate of 17.43% in October, this revenue declined sharply to -46.95% in November and -59.16% in December due to the demonetization impact.
• On the expenditure side, capital outlay grew by 12.41% by the end of December 2016 but remained under 1% of the Gross State Domestic Product (GSDP), indicating a need for increased investment in capital projects.

Kerala Fiscal Responsibility Act and Economic Challenges

• The Kerala Fiscal Responsibility Act of 2003 requires the presentation of the Medium-Term Fiscal Policy and Strategy Statement to the state legislature annually alongside the budget documents. Despite recent sluggish economic performance over the past two years, there are signs of a potential revival in the broader Indian economy. However, Kerala continues to face several entrenched issues that are hindering its economic development.
• At this critical juncture, it is essential to devise effective strategies to strengthen Kerala's financial foundation. The growing disparity between income and expenditure has exacerbated the state's economic difficulties. While it is necessary to address these issues, it is neither feasible nor wise to drastically cut spending, especially on crucial development projects.
• To alleviate the financial strain, the state administration implemented several tax reforms and stringent policies during the 2014-15 fiscal year. These measures have led to a slight increase in revenue collection in the last quarter of 2014-15 compared to the previous year.

Economic Strategy for Kerala Towards 2030

Kerala's vision for 2030 aims to align the state with more advanced regions globally. The economic policies will be centered around this strategic vision, with a focus on several key areas outlined in the perspective plan.
The core thrusts of the economic policy in the budget will include:

• Revitalizing the Agricultural Sector: Strategies will focus on restoring growth in agriculture by boosting productivity and competitiveness. This includes increasing investments in agriculture and improving access to agricultural credit. Special attention will be given to rejuvenating the coconut agriculture sector, which remains a primary income source for many.
• Ensuring Critical Infrastructure Investments: Significant investments will be made in infrastructure to support overall economic growth.
• Building a Digital Kerala: Efforts will be directed towards creating a digitally advanced Kerala to enhance efficiency and accessibility.
• Providing Affordable Housing: There will be a focus on providing affordable housing solutions for the poor.
• Promoting Entrepreneurship: The state will work on fostering entrepreneurship to create more employment opportunities.
• Sustainable Development: The agenda will include sustainable development practices to balance growth with environmental and social considerations.

The state is determined to improve its fiscal position by augmenting revenue and rationalizing expenditure. The additional funds from the 14th Finance Commission’s recommendations will help consolidate the fiscal situation. However, the decline in central plan transfers poses a significant risk to the state’s fiscal health. While the recommendations of the 14th Finance Commission have yet to be fully accepted by the union government, Kerala plans to adhere to these recommendations to ensure better fiscal management and achieve the set fiscal consolidation targets.